Rackspace May Be Bluffing With Talk of Acquisition Offers, Say Investors

Tech giants were supposed to cannibalize Rackspace’s business. But, according to the cloud hosting company, they may want to absorb it instead.

Rackspace revealed in a Thursday SEC filing that it hired investment bank Morgan Stanley to help weigh offers for its business, which stores data and manages software for enterprises on remote servers. Rackspace’s products are more expensive than other cloud hosting companies, such as Google, $GOOG, but management insists that their customer service makes it worth the premium.

The SEC filing indicates others think so too. “In recent months, Rackspace has been approached by multiple parties who have expressed interest in exploring a strategic relationship with Rackspace, ranging from partnership to acquisition,” wrote Rackspace General Counsel Tiffany Lathe in the May 15 filing. “No decision has been made and there can be no assurance that the Board’s review process will result in any partnership or transaction being entered into or consummated.”

Shares rose more than 20% on the news. But investors on StockTwits.com doubted Rackspace would have any suitors.


$RAX why would I even pay a 20% premium to a very competitive commodity business, which I can build myself quickly?

— Mike (@scottsdalem) May. 16 at 12:00 PM

The cost of hosting data remotely continues to fall, pressuring Rackspace’s margins and threatening to make its relatively expensive “managed hosting” business obsolete. Sentiment on the stock is 68% bearish, according to StockTwits’ analytics.

Indeed, some saw Rackspace’s hiring of Morgan Stanley as evidence that management realizes it cannot be successful without a deep-pocketed buyer capable of pouring billions into a cloud infrastructure business. When you are competing with the likes of Amazon, $AMZN, Google, $GOOG, and Microsoft, $MSFT, it is easy to be outspent. They bet against a lucrative buyout Friday.

$RAX Purchased June $35 puts

— Rudy Cortes (@CortesAnalysis) May. 16 at 02:17 PM

Still, other investors on StockTwits.com debated potential suitors and offers. Microsoft was among the most common suggestions. The tech giant has more robust enterprise cloud software, compared to other cloud hosting companies such as Amazon. As a result, a company like Rackspace that prides itself on customer service offered businesses could be attractive, argued some investors.

$RAX Microsoft knocking?

— Eric (@BullGuy) May. 16 at 01:01 PM

Advanced Micro Devices, $AMD, was another name mentioned on StockTwits.com. The semiconductor company does not have a cloud hosting service, but it does make processors that promise to allow companies to better run services from remote servers.

$AMD As I said, we're using $RAX servers at work (I work at very large IT 120Billion worth) and they have AMD processes on them…

— chunky (@sponga) May. 16 at 12:37 PM


$AMD Possible $RAX And $AMD Merger

— Florian (@FlorianBaker) May. 16 at 12:09 PM

Emails to Microsoft and AMD media contacts concerning potential interest in Rackspace were not immediately returned.

In the filing, Rackspace said the company had not set a timetable for completion of any deal.


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